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Are you a subcontractor, contractor, or project owner that is caught up in a payment dispute in connection with work performed or materials supplied for a construction project in Nebraska? If so, then there is a good possibility that the Nebraska Construction Prompt Payment Act applies and impacts the rights of the parties involved. In general, the Nebraska Construction Prompt Payment Act applies to numerous public and private construction contracts and subcontracts in Nebraska, and it shapes the rights of subcontractors, contractors, and project owners when a dispute arises.

Payment Requirements

The Act mandates that when a contractor has performed work in accordance with the provisions of a contract for an owner, the owner must pay the contractor within thirty (30) days after the owner has received a payment request made pursuant to the contract. The timeline for payment of a subcontractor is triggered when the contractor receives payment from the owner. In this regard, when a subcontractor has performed work in accordance with its subcontract, and all conditions to payment have been satisfied, the contractor must pay the subcontractor within ten (10) days after the contractor receives a periodic or final payment from the owner.

Impacts on Retainage

The Act also impacts retainage that can be held on projects by limiting the amount of retainage allowed and providing a clear timeline for the release of project retainage. Specifically, an owner, contractor, or subcontractor may only withhold retainage of either 10 percent or the amount stated in the applicable agreement, whichever is lower. In addition, so long as the contractor or subcontractor provides satisfactory and reasonable assurances of continued performance and financial responsibility to complete the work and if the work is at least 50 percent complete, no more than 5 percent of additional progress payment can be withheld as retainage.

The Act also governs when retainage must be released on a project. Under the Act, the owner must release and pay all retainage for work completed in accordance with the contract within 45 days after the project, or a designated portion thereof, is substantially complete.

Payment Withholding

On a project covered by the Act, a payment can only be withheld: (1) For retainage; (2) if allowed in the contract when (a) reasonable evidence shows that the contractual completion date will not be met due to unsatisfactory job progress; or (b) third party claims are filed or there is reasonable evidence that such a claim will be filed; or (c) contractor fails to make timely payments; or, finally, (3) after substantial completion, in an amount not to exceed 125% of the estimated cost to complete the remaining work.

Excluded Contracts

Although the Act is widely applicable, it is important to understand when the Act does not apply. For example, the definitions of a contractor and subcontractor under the Act exclude individuals and entities “performing work on a contract for the State of Nebraska or performing work on a federal-aid or a state-aid project of a political subdivision in which the state makes payments to the contractor on behalf of the political subdivision.” As a result, work being performed on one of the above mentioned public contracts would not be covered by the many provisions of the Act but would instead be subject to specific notice requirements that are stated in the Act for these types of agreements. Another example of work that is excluded from the coverage of the Act is residential construction that consists of less than four residential units.

Failure to Comply- Interest and Attorney’s Fees

Failure to comply with the Act results in an accrual of interest on the unpaid balance beginning on the day following the payment due date, and it accrues at 1% per month or a proportional fraction thereof on the unpaid balance. Interest is due only after the (sub)contractor first provides notice to the person/entity required to make payments pursuant to the prompt pay provisions. However, it should be noted that, generally speaking, acceptance of a progress payment or a final payment eliminates a (sub)contractor’s ability to recover interest on outstanding payments. The Act also states that a court has discretion to award a plaintiff (but not the defendant) reasonable attorney’s fees and costs when they successfully prosecute a violation of the Act.

Take Away

Owners, contractors, and subcontractors must be familiar with the Act because it impacts the aforementioned issues of payment timelines, withholding of payment, retainage, and the ramifications of a violation of the Act could be significant. Furthermore, to the extent that a payment is impermissibly withheld in violation of the Act, the aggrieved party has a right to seek payment under the Act and possibly recover its attorney’s fees and statutory interest. If you have questions about the Nebraska Construction Prompt Payment Act and whether it applies to your project, please do not hesitate to contact one of the members of Koley Jessen’s Construction Industry Practice Area.